Configuration in a Cloud Computing Arrangement

Keywords: Mazars, Thailand, IFRS, IFRS IC, IAS 38, SaaS, IASB

14 June 2021

The Committee received a request as to how a customer should account for the configuration and customisation costs associated with software purchased from a supplier in a Software as a Service (SaaS) arrangement.

The Committee considered that this topic was covered by existing standards, so decided not to add the issue to its work plan.

In the fact pattern submitted, the contract grants the customer the right to access the supplier’s software and is therefore recognised in the customer’s accounts as a service received (i.e. the right to receive access is not recognised as an asset).

The customer also incurs two types of costs:

• configuration costs (e.g. defining parameters); and
• customisation costs (e.g. changing or adding new lines of code that will generally modify or create additional functionalities within the software).

The Committee analysed the request to determine whether these costs should be recognised as an intangible asset under IAS 38. It also considered what accounting principles should be applied if the costs are not recognised as an intangible asset.

Do configuration and customisation costs meet the definition of an intangible asset?

After drawing attention to the rules set out in IAS 38 on accounting for intangible assets, the Committee pointed out that in the situation under consideration, the software is controlled by the supplier and not the customer.

Thus, in order to determine whether or not the costs meet the definition of an intangible asset, the entity must consider the nature of the costs and the impact of the configuration or customisation on the software.

The Committee noted that, in most cases, the customer would not recognise an intangible asset because it does not control the software, and the configuration and/or customisation activities do not create a resource controlled by the customer that is separate from the software.

However, the Committee observed that in some situations, the contract might result in additional lines of code, for example, from which only the customer would derive future economic benefits. In such a case, the customer must assess whether these lines of code are identifiable and meet the criteria for recognition of an intangible asset under IAS 38.

If the configuration and/or customisation costs do not meet the definition of an intangible asset, what accounting treatment should be used?

If the costs do not meet the definition of an intangible asset, the customer shall apply paragraphs 68–70 of IAS 38:

• the customer recognises the costs as an expense when it receives the configuration and/or customisation services from the supplier (and not when the customer uses those services);
• IAS 38 does not include any specific guidance on how to assess the contract with the supplier to determine when the supplier provides the configuration and/or customisation services. In accordance with IAS 8.10 and 11, which specifies that in such a situation an entity shall draw on other standards that cover similar topics, the Committee referred to the provisions of IFRS 15. This standard specifies how to identify the performance obligations in the contract and when the underlying goods or services are transferred to the customer;
• if the configuration or customisation services are carried out by the supplier of the software (or a subcontractor of the supplier), the customer shall apply the requirements of IAS 38.69 and 69A and must determine when the configuration or customisation services are provided:
  • if these services are distinct from the right to access the software, the customer recognises the costs as an expense when the supplier configures or customises the software (this would also be the case if the services are provided by a third party);
  • if these services are not distinct from the right to access the software, the costs are recognised as an expense when the supplier provides the customer with access to the software, over the contract term (i.e. the costs are spread over the contract term);
• if the customer makes a payment for the configuration and/or customisation services in advance, this prepayment is recognised as an asset (in accordance with IAS 38.70).